Investing Smartly & Staying Calm in a Volatile Market

Investing Smartly & Staying Calm in a Volatile Market

by Amy Lignor

In just this past week, traders have been getting struck by nerves as they watch the stock market turn volatile before their very eyes. However, there is a very well-proven fact to take into consideration; a fact that is stated by everyone in the

industry from E*Trade to Investopedia to Mad Money’s own Jim Cramer on CNBC: The market has to “clear itself out” from time to time.

The stock market’s fall has been highlighted with intraday drops for the Dow ranging all over the board, from 1,600 points to 1,000 points and so on. Drops which immediately struck fear in the hearts of many investors, prompting them to reassess their portfolios. But…this is no time to panic. Although the variety of drops was frightening, it is important to remember that the actual gains in recent years that the stock market has managed to achieve remain incredibly strong. Remember, if you choose to overreact during moments such as this, then you have a much higher chance of losing a fortune.

So…is there a way to actually gauge and control anxiety when it comes to the investment markets? Of course. The Chicago Board of Exchange Volatility Index (VIX) actually measures it. The VIX reacts in real time (just as the stock market does) and measures the level of volatility in the U.S. markets over the next 30 days. The VIX has indicated that the market is volatile, but there are ways to keep “safe” when it comes to your portfolio.

Although short-term traders may say that the perfect time to make money is during a volatile market, the truth is that all traders with all types of skill levels and backgrounds will face challenges in this market. And when looking to cut the anxiety and protect your portfolio, the best way is to utilize those conservative strategies that short-term traders like to refer to as…boring.

First, think about hedging as being a great insurance policy. Say you own a stock that is now in a decline. One way to ‘hedge your bets’, so to speak, would be to purchase a put option, with a strike price below where you purchased the stock. You won’t lose money on any move made below your strike price.

Another way is to educate yourself on the term ‘beta’. Beta is the measure of volatility in a particular security. If a stock has a beta of 1.0, expect it to move at the same rate as the S&P 500. A stock with a beta below 1.0 is less volatile than the market index; a beta that is higher is more volatile. In times of extreme market volatility, concentrate on low beta stocks that pay a dividend.

Retail investors who are trading in the market have to know when the market is too volatile. When it is, they need to move into safe haven investments. Investors who already have long-term portfolios should not do anything when the market turns volatile. The market will stabilize, but until then you can rely on dividend payouts for safe, consistent income.

Another strategy comes from staying with the index and not diverting into stocks you simply don’t understand. Efficient market hypothesis (EMH) is a theory; it states that it is absolutely impossible to beat the overall market (i.e., you beating the House in Vegas is not going to happen). Picking stocks individually will not yield better results over the long term, so investing in an index fund is (statistically) the best way to make money, especially in volatile times.

In a volatile market increase your time with each trade you make. In other words, invest long-term and do not ‘bet’ on positive things happening overnight. Until markets calm, you can find safety in an undervalued stock or buying an index fund when the market is at the bottom of its range. But you must be willing to hold that position for at least a year. The length of time you are willing to give to your investment matters. After all, every dividend payment decreases the cost basis of your stock, so the longer you’re in, the more money you’ll make.

Unlike what you would expect from the NFL, the bottom line when it comes to being safe during a volatile market is this: The best action is the lack of it. Creating anxiety or getting fearful during a volatile market is the quickest way to make a bad decision and lose money. So set up that long-term portfolio and you will be set up to take on any type of market.

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